Tyson Foods will pay Hillshire Brands' $163 million breakup fee to Pinnacle Foods in order to acquire the company, according to an agreement between Tyson and Hillshire filed Wednesday with the U.S. Securities and Exchange Commission.
On Sunday, Tyson offered $8.55 billion -- $63 per share -- to buy Hillshire , but its offer is dependent on Hillshire terminating its agreement to buy Pinnacle, maker of Duncan Hines cake mixes and Vlasic pickles, among other products. The deal would make Tyson the world's largest seller of prepared meats.
Hillshire announced it had reached an agreement to buy Pinnacle on May 12. Analysts have speculated that Hillshire's agreement set off a bidding war between Tyson and Pilgrim's Pride, which eventually offered $55 per share for Hillshire.
Neither company wanted to acquire Pinnacle. Hillshire has not announced its decision regarding the Pinnacle deal, but analysts expect the breakup to go through.
"When external factors set this in motion, we were in a position where we could seize on the moment and do what's best for Tyson Foods and our shareholders," Donnie Smith, Tyson's chief executive officer, said during a conference call Monday.
The agreement between Hillshire and Tyson carries a clause similar to the one between Pinnacle and Hillshire. While Hillshire may back out of the deal with Tyson if it receives a superior offer, the company would have to pay a breakup fee worth about $261 million.
Tyson stock was up slightly Wednesday, with shares closing at $36.09, an increase of 2 cents.
However on Tuesday, Standard & Poor's Ratings Services placed Tyson, which has a BBB credit rating, on a credit watch with negative implications after its deal with Hillshire.
And Credit Suisse downgraded Tyson from a "neutral" rating to an "underperform" rating. Credit Suisse also now has a $35 price target on the stock, down from $40.
Analysts are concerned about the debt Tyson will have to take on to acquire Hillshire.
"I think we're all waiting to hear what the credit rating agencies will have to say," said Kenneth Shea, a senior equity analyst at Bloomberg Industries.
During the conference call on Monday, Smith said the company was looking into rebalancing investments and issuing equity to pay down the debt quickly.
Tyson's prepared-foods segment makes up about 9 percent of its sales and 5 percent of its operating income. Adding Hillshire's brands, including Jimmy Dean sausages and Ball Park Franks, will double the prepared-foods segment's revenue contribution and quadruple the segment's share of the company's operating income.
With the Hillshire acquisition, Tyson projects that it will make about $300 million in cost reductions over three years in areas such as shared distribution, purchasing and marketing.
"We plan on keeping our investment grade rating," Smith said.
Business on 06/12/2014